US businesses prefer to hoard their cash

When US Federal Reserve officials meet in September to decide whether to raise interest rates, they will have a plethora of economic data to ponder. But if they want to get a novel twist on the current state of finance, they should take a glance at the balance-sheets of American companies.

For these days, it seems that a subtle — and largely unnoticed — shift is under way in how American companies are placing their spare funds. And, like so much in western finance today, it is a trend that is partly driven by some unexpected side effects of a low interest rate world.

To understand this, take a look at a survey recently released by the Association of Financial Professionals on the behaviour of corporate treasurers. This analysis starts by highlighting a point that is well-known: namely that holdings of corporate cash have recently swelled, because company profits have surged, but investment has remained relatively low.

The AFP reports, for example, that 31 per cent of treasurers said that their cash balances rose last year, while 46 per cent reported that they were unchanged, and most treasurers expect this pattern to continue. Little wonder, then, that economists estimate that there is between $1 trillion (Dh3.67 trillion) and $2 trillion of unused firepower now sitting on corporate balance sheets.

But what is most interesting is a detail that is normally hidden from view: namely what treasurers say they are doing with this money mountain. Until recently, when treasurers were blessed with spare funds, they tended to store these in the capital markets.

The AFP says, for example, that in 2008 treasurers were placing about half of their short-term money in money market funds, treasury bills and other securities; one-fifth was sitting in vanilla bank deposits. That makes sense: in the early years of the 21st century it was taken for granted that finance was evolving towards a world where the capital markets ruled.

Sticking money into bank deposits seemed an old-fashioned thing to do.

But today that evolution has gone into reverse: at present some 56 per cent of American corporate cash is sitting in bank deposit accounts, the highest proportion since the AFP started its survey 10 years ago. Money market funds, by contrast, now hold a mere 15 per cent of short-term corporate funds.

In some senses, this is surprising. Never mind the fact that bank accounts seem retro; what is more notable is that they are not entirely “safe”, since Federal deposit insurance only covers part of these deposits. And bank accounts today pay virtually no interest; some even charge for storing cash.

But it seems that treasurers have been quietly shifting their funds for three reasons. First (and thankfully), they now have more trust in the health of American banks. Second (and less positively), they are becoming worried about the regulatory environment around the capital markets.

Most notably, with the forthcoming Securities and Exchanges Commission reforms to the money market world, corporate treasurers are quietly withdrawing from some of these funds.

The third factor is that, in a world of ultra-low rates, it has been so hard for treasurers to get any returns from capital market instruments that many have given up even trying. Money is being stashed in retro bank accounts because nobody can think of anything better to do.

It is a form of zombie finance.

Now, the treasurers are certainly not alone in this stance: many retail investors are doing the same. The US Trust, to name one example, recently reported that two-thirds of wealthy individuals hold more than 10 per cent of their assets in cash, an unusually high proportion.

If you want to be optimistic, it is possible to think — or hope — that this pattern will soon come to an end. If the US economy keeps posting a recovery, companies may start investing their spare cash in plant and equipment — or even people.

Similarly, if the US Fed raises interest rates this autumn, treasurers may start to believe that it makes sense for them to store their money in the capital markets, which will almost certainly produce better returns before those retro bank accounts.

But until then, American companies are living in a financial system that seems calm on the surface, if not almost normal — but is nevertheless distorted in subtle, hard-to-see ways. It is little wonder, then, that so many Fed officials are keen to “normalise” the price of money again.

Better just hope they can do this in a way that does not cause too many shocks to the banks, let alone to those half-hidden corporate treasurers.

— Financial Times